Interpreting Ex-Dividend Evidence: The Citizens Utilities Case Reconsidered
AbstractNumerous empirical studies have attempted to measure the effect of changes in dividend policy on corporate equity values. One of the most popular study methodologies has been an examination of share price changes around ex-dividend days. Comparing the movement in a stock's price with its nominal dividend payment leads to estimates of the stock market's relative valuation of dividends and capital gains. Ex-day price studies are often interpreted as showing that investors recognize their tax liabilities and therefore discount their dividend income. These studies predict that firms which reduce their payout ratio shouldrise in value, and buttress the view that an increase in dividend taxes would reduce the value of the stock market.This study disputes these conclusions by presenting a "counterexample" which suggests that ex-dividend day studies provide limited insight into the effects of dividend taxes, or dividend policy, on corporate valuation. I analyze a firm with two different classes of common stock: one class pays taxable cash dividends, while the other pays untaxed stock dividends. On exâ€”dividend days,the taxable-dividend shares experience a price decline equal to about seventy five percent of their dividend payment, while the untaxed stock distribution shares fall by the full value of their dividends. However, the prices of the two classes of equity do not reflect this apparent market preference for non-taxable distributions. The average price of taxable-dividend shares is approximately equal to that of the untaxed dividend shares, indicating that the market considers the two shares as equivalent. These findings are important for several reasons. First, they cast doubt on earlier conclusions, based on ex-dividend day studies, about how a change individend taxes or payout policy would affect the market value of equity capital. Second, the results may provide new insights which help to explain why firms pay dividends.They deny the view that investors hold dividend paying stocks only because they are necessary for diversification, and may suggest that there is some attribute of cash dividends which investors genuinely value.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1131.
Date of creation: Jul 1986
Date of revision:
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Auerbach, Alan J., 1983.
"Stockholder tax rates and firm attributes,"
Journal of Public Economics,
Elsevier, vol. 21(2), pages 107-127, July.
- Jerry R. Green, 1980. "Taxation and the Ex-Dividend Day Behavior of Common Stock Prices," NBER Working Papers 0496, National Bureau of Economic Research, Inc.
- Black, Fischer & Scholes, Myron, 1974. "The effects of dividend yield and dividend policy on common stock prices and returns," Journal of Financial Economics, Elsevier, vol. 1(1), pages 1-22, May.
- Lakonishok, Josef & Vermaelen, Theo, 1983. " Tax Reform and Ex-Dividend Day Behavior," Journal of Finance, American Finance Association, vol. 38(4), pages 1157-79, September.
- Elton, Edwin J & Gruber, Martin J, 1970. "Marginal Stockholder Tax Rates and the Clientele Effect," The Review of Economics and Statistics, MIT Press, vol. 52(1), pages 68-74, February.
- Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
- Miller, Merton H & Scholes, Myron S, 1982. "Dividends and Taxes: Some Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1118-41, December.
- Long, John Jr., 1978. "The market valuation of cash dividends : A case to consider," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 235-264.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.